Here's Why Amazon Is Increasing Focus On Its Apparel Business

Amazon appears to be firing on all cylinders to establish itself as a strong player in the online apparel market. In December last year, the company unveiled “Buttoned Down,” a private label premium shirt brand which is available exclusively to its Prime members. Reports suggest that the company is now planning to develop its own line of workout apparel and is rumored to be looking to acquire bankrupt apparel company American Apparel. Private labels provide higher margins to the e-commerce retailer, and Amazon is looking to leverage this in the apparel market. The company is already the largest seller of clothes online in the U.S. and Amazon is likely to achieve a market share of nearly 20% in the U.S. apparel market by 2020. With increased consumer comfort levels in purchasing apparel from its platform, we believe the focus on private labels can ensure that the company generates higher margins from this business in the long term.

According to a survey conducted by Morgan Stanley, 60% of consumers said that they would buy more clothing on Amazon if it sold a wider selection of well known, fashionable clothing brands. The company is courting top brands to sell on its platform which should attract more users. Further its online platform has an advantage over physical retailers to bring newer designs more quickly to consumers through a supplier network, without inventories piling up. However, Amazon’s focus seems to be on private labels where the company is looking to grow margins.

According to our estimates, Amazon’s General Merchandize EBITDA (earnings before interest tax depreciation and amortization) margin will increase gradually from around 10% in 2017 to slightly over 10.5% by the end of our forecast period.

Private labels can push these margins higher and can positively impact the company’s valuation. If the division’s EBITDA margin increases at a faster pace and the growth is 200 bps more than our estimate by 2023, there can be a nearly 10% upside to our price estimate.

Amazon already enjoys consumer confidence in the apparel segment. We believe the focus on this segment is justified to increase market share and profitability. This initiative should drive profitability for the company in the long term.